Building Peace

through Trade
The Future of Indo-Pak Relations
Building Peace through Trade
The Future of Indo-Pak Relations
Published by
Consumer Unity & Trust Society
D-217, Bhaskar Marg, Bani Park
Jaipur 302016, India
Email: cuts@cuts.org
Website: www.cuts-international.org
CUTS International, 2011
Table of Contents
Preface ........................................................................................................... i
Freedom from past ...................................................................................... 1
Once opportunities arise ........................................................................................... 7
Time to accelerate economic ties ........................................................................... 10
For peace to reign, prepare for trade .................................................................... 13
VIEW: Why should trade await a final settlement? ............................................ 17
For more than mutual assurance
Indo-Pak lessons from the Argentine-Brazilian model of cooperation ............... 21
Trade against terror and tragedy .............................................................. 24
Trade to the forefront .................................................................................. 27
India & Pakistan: Being Economically Savvy Yields a Peace Dividend .................. 31
Indo-Pak trade: Cutting the Gordian knot ................................................................. 34
Six Decades after Separation .................................................................................... 36
Preface
W
hen I sat down to write this piece, the Cricket World Cup has
just ended, with India winning the trophy. For less enthusiastic
cricket buffs like me, I watched few matches only in snatches. One
match which I did see at some length was the semi-final match
between India and Pakistan, as well as the India Sri Lanka finals.
As the Indo-Pak match was scheduled the Indian Prime Minister
invited his counterpart from Pakistan to witness it live at Mohali in
Indian Punjab. Media termed this as Cricket Diplomacy with the
pregnant wish that such gestures will lead to increase in the dialogue
process. This was a welcome move. The Pakistani PM did come though
he must have been disappointed that they lost the match to India.
However, he was graceful to accept defeat and went back not as an
unhappy person but perhaps as a leader with the thought that his
visit would add value to the process of dialogue to achieve the elusive
peace between the two nations with a history of conflicts and distrust.
One way forward in the peace building process is to enhance not just
interaction, but trade.
Both me and my friend in Pakistan, Abid Suleri have been writing
and publishing articles on India-Pakistan trade relations in our
respective media. One important issue is that Pakistan in spite of
being a member of GATT/WTO and also member of the regional
association SAFTA, has not/do not want to reciprocate the status of
MFN to India. On the other hand, every other time and at every
international forum it brings in the Kashmir issue on the forefront,
forestalling any major breakthrough in two-way trade and meaningful
economic cooperation between the two nations. My answer is simple.
History provides ample evidence that no neighbouring countries have
ever survived and progressed on prolonged belligerent relations.
History repeats itself is the saying going time and again. The famous
Globalisation and Trade Policy " i
economist, Wilfred Pareto (1889) wrote, customs unions and other
systems of closer commercial relations could serve as the means to
the improvement of political relations and the maintenance of peace.
During past 3 to 4 years we have been actively advocating and also
writing in newspapers that why should trade await a final
settlement. When India and Pakistan can play cricket, why cant
they undertake trade? Policy makers in Pakistan have so far been
insisting that unless all disputes between two countries are resolved,
trade and economic cooperation will proceed on a case-by-case basis.
However, disputes or even armed conflicts have never prevented
economic cooperation around the world. France and Germany had
been at loggerheads for a millennium, but now both are major players
in the European Union. Likewise, Malaysia and Thailand had border
disputes but this has not prevented them from cooperating
economically through the ASEAN Free Trade Agreement.
Peace Dividend
There are examples across the globe of trade playing a positive role
in conflict resolution between neighbouring countries. The EU, Asean
and Mercosur are often cited as venues for improved political-military
relations. The evolution of European Union over almost 50 years has
proved to a peace-dividend generator. Given that bitter memories of
the Nazi atrocities remained vivid among the people in Europe,
especially those of Poland, Holland and Russia, this should be deemed
as no minor achievement. The strong economic ties amongst 10
Southeast Asian nations (ASEAN) have played the critical role in
bringing the belligerent countries which had border conflicts. It was
hard to believe that Thailand was on the American side in the Vietnam
war; that Vietnam invaded Cambodia in 1975; that Vietnam and
China fought in 1979 and that Thailand had a border skirmish with
Laos as recently as 1988. Regional cooperation has come a long way
since then. The nuclear rapprochement between Argentina and Brazil
has eliminated the historical rivalry and mistrust between them and
the whole region has benefited too.
The regional trade agreements (RTAs) that expand trade flows, as
some studies indicate, appear to have a substantial dampening impact
on conflict. Mansfield and Pevehouse (2000) found that the outbreak
ii " Globalisation and Trade Policy
Globalisation and Trade Policy " iii
likelihood of a militarized inter-state dispute declines by about 50
percent, if both belong to the same regional trade agreement. As an
RTA, SAFTA can provide institutions and a forum for the bargaining
and negotiations needed to address tensions before they erupt in
conflict.
Informal Trade
A wrong and unfounded notion afflicting the people of Pakistan that
India, being a huge nation and relatively more efficient, will swamp
the entire Pakistani economy. If strong economies always dominate
bilateral trade then USA and China would dominate all economies.
Admittedly, India-Pakistan trade is competitive rather than
complimentary, and according to some trade experts, there is little
scope for expansion. However, a large informal (illegal) trade is still
taking place between the two nations, estimated to be more than
four times as high, standing at about US$1.5 to US$2bn, as against
formal trade of just US$400mn (in 2004), suggests a huge trade
potential. If this informal trade is allowed to take place in a formal
way under SAFTA not only bilateral trade will increase but also
strong economic and consequently political ties will develop.
Two Measures to Enhance Cooperation
Two specific measures from international community, particularly
from the developed countries, like the US and EU would go a long
way if taken by them earnestly. They are: (i) Qualifying Industrial
Zones (QIZs) and (ii) cross-border infrastructure projects. Both these
schemes have played positive and substantive role in not only
mitigating conflicts but also help improve trade and investment
relations between erstwhile rival countries. The US congress
authorized designation of qualifying industrial zones (QIZs) between
Israel and Jordan (1999) and Israel and Egypt (2004). The QIZs
allow Jordan and Egypt to export to the U.S. duty-free if the products
contain a minimum level of inputs from Israel. The purpose of this
trade initiative was to support the prosperity and stability in the
region by encouraging economic cooperation. Prompted by this
successful endeavour I, by writing a letter to the USTR, tried to
convince that the introduction of such a similar scheme between
iv " Globalisation and Trade Policy
India and Pakistan, be under GSP or SAFTA, would, like in the West
Asia, bring peace and enhance economic cooperation in the South
Asia. I did get a response, but no action.
The East-West Economic Corridor (EWEC), a 1500-km highway project
crossing Greater Mekong Sub-region in the South-East Asia
connecting South China Sea to the Indian Ocean, and the Middle-
East Regional Cooperation Projects have encouraged trade and
cooperation, and thereby peace and prosperity in the regions. Regional
cooperation projects have the potential to improve the well being of
all parties involved because of the scale economies they permit, the
complementarities between the economies, and the externalities they
induce (multiplier effects, attraction of foreign investment, diminution
of gaps etc.) The Iran-Pakistan-India gas pipeline, if implemented
will surely open more vistas for regional cooperation in the region.
Time to Accelerate Economic Ties
More recently due to absence of mutual recognition of standards
Pakistan and India both blocked imports of commodities across
borders, sugar imports from India by Pakistan and cement imports
from Pakistan by India. Both those barriers were erected in the
name of standards (a non-tariff barrier), but clearly there existed
vested interests behind them in the form of local producer cartels:
sugar in Pakistan and cement in India. And neither country has had
an effective competition law. Only recently have both countries
adopted modern competition laws but the same have to evolve. How
our target to take the volume of trade between the two countries
from present level of US$1.76bn per annum to US$10bn by 2010
would be achieved, is a question which can not find any easy solution?
Trade theory amply demonstrates that imports are an effective
competition policy tool to reduce the local market dominance of
domestic interest groups, a situation that delivers sub optimal
outcomes, which go against the interests of the consumers and
economy at large. Lets learn from our humble housewife, who seems
to have more economic wisdom than the political masters of our
countries. Buy from the cheapest source, in commercial language
called forum shopping, shopping from the most cost effective forum/
Globalisation and Trade Policy " v
source. After all we just happen to be neighbours. What if our politics
makes a little noise! It is in this spirit and understanding that these
articles/papers have been written and I do believe that the readers
of these papers will find them as interesting and exciting and that
it will contribute to focus on the future by correcting the past mistakes
and wrong doings. I do subscribe to the view expressed by people on
both sides of the border (as appeared in the opinion poll conducted
by the Indian Express in alliance with Dawn News and CNN-IBN
Survey and also NDTV 24X7 debate in 2009) that friendship and
cooperation (read trade) are a prerequisite for improving relations
between the two neighbouring nations- India and Pakistan.
Jaipur Pradeep S Mehta
April 2011 Secretary General
de 1
Freedom from past
Pakistan and India need to go beyond formal exchanges to
resolve their differences. The world abounds in examples that
the two countries can follow to foster peace and prosperity in
South Asia
O
nly a few weeks ago, Pakistan and India exchanged the lists of
their nuclear installations. The purpose of the exercise is that
these installations will not be attacked by the two countries in the
event of any conflict. But exchanging lists is not a sufficient cover for
an unwarranted action by either country. Only a relationship that is
based on trust and willingness to resolve all issues and is backed by
economic and commercial links as well as strong support from the
international community can guarantee that Pakistan and India don't
go to war against each other.
Can we, therefore, now start thinking of a forward looking strategy
which does not stop at the mere exchange of nuclear installations
and thus ensure that the threat of any nuclear or conventional attack
is extinguished for ever? The fact that other countries have
successfully done that only serves to highlight the inadequacy of the
current approach India and Pakistan are employing to resolve their
differences.
Even if we confine resolving the problem of nuclearisation of India
and Pakistan, a successful model to emulate exists in the form of the
Argentine-Brazilian nuclear rapprochement.
Published in
Jang, Pakistan, January 14, 2007
By Pradeep S Mehta & Abid Qaiyum Suleri
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During the colonial era, two European powers (Spain in Argentina
and Portugal in Brazil) expanded their own rivalry through territorial
conquests in South America. Even after their independence (Argentina
in 1816 and Brazil in 1822), the rivalry between the independent
states continued to reflect their colonial past. Competition for the
leadership of South America -- with elements of antagonism, rivalry,
and mistrust -- was always present in the bilateral relationships
between Argentina and Brazil.
Though the South American experience can be valuable for India
and Pakistan, one important difference must be kept in mind. While
Argentine and Brazil were competitors and rivals for the leadership
of South America, they were not enemies. The only war between
them took place in 1825, more than a century-and-a-half ago, giving
birth to a new (buffer) state, the Uruguay, through the peace treaty
of 1828. Since then, their relations have alternated between
cooperation and competition, but not a single shot has ever been
fired. Even a bitter border dispute between them was resolved by
arbitration, not war. In 1985, the time came when it was decided to
put an end once and for all to the rivalry and mistrust that had
pervaded bilateral relations for too long, especially by focusing on
social and economic relations.
Beginning with the 1980s, Argentina and Brazil initiated efforts
towards a nuclear rapprochement and by 1985 this process developed
in earnest. The period from 1985 to date can be divided into two
stages: During the first period, (1985-1988) purely bilateral approach
to the issue was undertaken while the second period between 1989
and the present had dual objectives: first, to give a legally-binding
character to the agreements already signed by the two countries, and
second, to take these obligations to the international field, making
the two nations part of the regional and global non-proliferation
regimes.
It is in this endeavor that these two countries along with Paraguay
and Uruguay formed the South American Common Market (the
MERCUSOR) in 1991 which was later joined by Chile in 1996 and
Bolivia in 1997. The aim of the formation of the common market was
to enhance trade and investment opportunities because these Latin
de 3
American countries had realised that closer and deeper economic
relations facilitated by free trade would further strengthen
understanding, faith, confidence and mutual cooperation among
themselves.
But if we want to go beyond the nuclear sphere and bring in all the
various aspects of bilateral relationship between India and Pakistan,
the world is not devoid of lessons that can be easily learnt. There are
several examples offered in the history where belligerent neighbouring
countries have moved from hatred, antagonism, rivalry and mistrust
to understanding, trust, faith and cooperation thereby enhancing
peace and prosperity between themselves and in the region.
It took several decades after the World War II to mend relations
between the people of Germany and those of France. The formation
of the European Union, giving rise to higher levels of economic well
being resulting from enhanced economic cooperation, has been
instrumental in reducing the enmities not only between France
and Germany but across the Western Europe and receding the
memories of the atrocities of the World War II from the minds of
most people, especially of the next generation which came of age by
the 1970s. Given that bitter memories of the Nazi atrocities remained
vivid among people in Europe even many decades after the World
War II, especially among those living in Poland, Holland and Russia,
this should be deemed no minor achievement.
Given the high level of economic and other cooperation among different
member countries of Asean (Association of Southeast Asian Nations)
, it is hard to believe that Thailand was on the American side in the
Vietnam war, that Vietnam invaded Cambodia in 1975, that Vietnam
and China fought in 1979 and that Thailand had a border skirmish
with Laos as recently as 1988. Regional co-operation has come a long
way since then.
There are several lessons that can be derived from the friendship,
cooperation and peace-making process across the globe. First and
foremost, to be successful, an exercise of this kind must be based on
a sincere purpose of reaching agreements to end nuclear race and/or
cross border terrorism and establish a climate of mutual confidence.
No moves in this field can have the slightest chance of success if they
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are taken with the ulterior motive of destabilising the other party or
lulling it into a false sense of security. As a first step, a country
should open itself to the other party, on the understanding that this
policy will be reciprocated. Information should flow fully and freely
from one country to the other. Of course, the climate of mutual trust
thus attained will not last if flanking and additional measures do not
follow to give it a permanent character.
Such additional measures include to keep talking: its never over
until its over. Secondly, constructive engagement works better than
pressure: Renewed efforts for willingness to support bilateral
confidence-building measures would lead to more progress than
diplomacy-based political criticism accusing each other for cross-
border terrorism (which of course needs strong action by both the
sides).
Thirdly, regional cooperation infrastructure projects have a potential
for the improvement of the well being of all parties involved. The
East-West Economic Corridor, a 1500 Km long highway project
crossing 6 GMS (Greater Mekong Sub-region) countries in the
Southeastern Asia connecting South China Sea to Indian Ocean and
the Middle East regional cooperation projects are some good examples
in this regard. In the same vein the mega-economic projects like the
Turkmenistan-Afghanistan-Pakistan and the Iran-Pakistan-India gas
pipeline projects would help in promoting trust and regional economic
cooperation between India and Pakistan.
Lastly, it may be beneficial to look for opportunities where the United
States (and European Union) foreign policy can support bilateral
initiatives that can have positive proliferation. For example, river
diplomacy in Argentina accelerated bilateral cooperation in the
nuclear area. The current initiative to expand upon bus diplomacy
in India and Pakistan should receive strong US and EU support.
Similarly, India and Pakistan can benefit if the US offers them
Qualifying Industrial Zones (like the ones in which exports from
Jordan and Egypt containing inputs from Israel enter duty-free into
the US market) under the Generalized System of Preferences of
international trade.
de 5
Skeptics would argue that in the case of India and Pakistan, the
Kashmir dispute is sui generis and thus the improvement of relations
is dependent upon its resolution. In this case, one can draw lessons
from North Ireland, which has been a bone of contention between
the United Kingdom and Ireland as well as a huge number of people
living in Norhern Ireland. The Irish Republican Army has agreed to
lay down its arms, and has also stopped any terrorist activity either
in Ireland or in the UK, after thirty years of conflict. Can the same
not be attempted in Kashmir, which has become a similarly
intractable problem between India and Pakistan as well among the
people living in various parts of Jammu and Kashmir.
Fortunately, due to various internal as well as external reasons, a
window of opportunity is opening wide for improving relations
between India and Pakistan. Both the Pakistani President General
Pervez Musharraf and Indian Prime Minister Dr Manmohan Singh
(apparently due to their own reasons) have suggested ways forward
to craft peace among the two nuclear countries. Similarly, people in
both the countries and in Kashmir have a strong yearning for peace.
They are dreaming of a South Asia free of hunger, poverty and
under-development. Like past 59 years, they have been wishing for
a new year during which their governments would shift the huge
resources being spent on defence expenditures to developmental
expenditures. On New Years eve, which incidentally was the Eid-
eve in India and Pakistan too, many expressed their desire to
celebrate festival across the border on various private TV channels.
Should we not imagine a South Asia full of peace and harmony?
Should we not let peace work for prosperity? Should cross border
tourism not take over cross border terrorism? There seem to be a
little ray of hope from the top. It is about time that we create the
pressure from the bottom and facilitate the peace process between
two nuclear nations through enhanced economic relations.
Some political observers are defining a new South Asia as a region
where various types of freedoms can be realised that is, freedom
from want, freedom from fear, and freedom to live with dignity. This
is premised on the axiom that every single individual on earth has
both the potential and the right to live a decent life. Let us work for
a new South Asia in 2007 and grab any opportunity for a long
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lasting peace following the examples in South America, Europe, and
Southeast Asia.
Pradeep S Mehta is Secretary General of CUTS International, a research, advocacy
and networking group board in Jaipur, India and Abid Suleri is Assistant Executive
Director of the Islamabad-based Sustainable Development Policy Institute.
This article can also be viewed at: http://www.jang.com.pk/
de 7
Once opportunities arise
Published in
The Financial Express, October 03, 2007
By Pradeep S Mehta
A
t a recent seminar in Kathmandu on trade in South Asia, the
issue of regional trade cooperation figured prominently. The
meeting resolved to focus on supply-side issues, which include a
rationalisation of standards and implementation of an effective
competition policy and law. It is no secret that the cause of regional
trade is mortgaged to Indo-Pak relations. Alas, recent incidents of
two-way non-tariff trade barriers, though unconnected, only appear
to stall the story. One was Pakistans blocking of sugar exports from
India, while India blocked cement imports from Pakistan. And we
wish to take the volume of trade from $1.76 billion per annum to
$10 billion by 2010. Both those barriers were erected in the name
of standards, but clearly, there existed vested interests behind them
in the form of local producer cartels: sugar in Pakistan and cement
in India. And neither country has an effective competition law.
Now, India and Pakistan are signatories to the WTOs SPS and TBT
agreements, and if these consignments are not in conformity with
the stated standards, then officials have a right to hold them up.
But if the same sugar is good for Indians and cement for Pakistanis,
why the brouhaha?
On the other hand, both India and Pakistan argue at the WTO that
there should be mutual recognition of standards and/or equivalence.
If they cannot do so at the regional level, what right do they have
to do so at the WTO in Geneva? Whenever either party opens its
mouth in Geneva at the negotiating table, someone points this out.
8 tio
Thus, the way ahead is to start identifying minimum standards and
safeguards which should have mutual recognition, taking into account
existing standards in the respective countries, and possibly accept
them as regional standards for trade within the region. Second, they
should also adopt good competition laws to foster regional cooperation
under the Safta framework. Once this is done, not only Pakistan and
India, but the whole developing world can demand the same at
Geneva.
That traders are sometimes a little too clever is a worldwide
observation. One example from Zambia beats all logic. Recently, the
Zambian government confiscated sugar imports from Zimbabwe on
the pretext that imported sugar is not fortified with vitamin A. No
prizes for guessing who was behind this illogical standard; Zambia
has just one rent-seeking sugar factory that is making a mountain
out of a sugar heap under the pretence that fortified sugar is the
health equivalent of iodised salt. The sobering truth is that vitamin
A can easily be obtained via other food sources in a balanced diet.
Trade theory amply demonstrates that imports are an effective
competition policy tool to reduce the local market dominance of
domestic interest groups, a circumstance that delivers suboptimal
outcomes which go against the interests of the consumer and economy
at large. Domestic trade policy must never be held hostage to vested
interests, and a perspective of the larger national welfare must never
be lost in devising trade and other policy instruments and practices.
Engaging in mutual trade brings benefits to all. This is not rocket
science, and even the common man understands this. Pointers in
this direction were offered by a recent opinion poll conducted
simultaneously in India and Pakistan by The Indian Express in
alliance with Dawn News and CNN-IBN, as also by an NDTV 24x7
debate held in Karachi and telecast on June 18, 2007 (Indo-Pak:
Generation Gap): people on both sides of the border feel that
friendship and cooperation (read trade) are a prerequisite for
improving relations between the two neighbours.
There are examples across the globe of trade playing a positive role
in conflict resolution between neighbouring countries. Even regional
de 9
trade agreements (RTAs) that expand trade flows, as some studies
indicate, appear to have a substantial dampening impact on conflict.
Mansfield & Pevehouse (2000) found that the outbreak likelihood of
a militarised inter-state dispute declines by around 50% if both belong
to the same regional trade agreement. As an RTA, Safta can provide
institutions and a forum for the bargaining and negotiations needed
to address tensions before they erupt in conflict. The EU, Asean and
Mercosur are often cited as venues for improved political-military
relations. In Africa, RTAs that address the management of cross-
border resource issues are more effective in reducing military conflict
than other RTAs.
There are examples galore of conflicts being contained by trade
agreements. China imposed a ban in 2003 on Japanese rice by putting
it on a list of agricultural imports deemed at risk of insect infection.
But now, an agreement (rice diplomacy) has been signed between
Japan, the worlds most expensive rice producer, and China, the
worlds largest rice consumer, and this has rekindled the relationship.
In 1979, Brazil signed an agreement with Argentina and Paraguay,
thereby ending their dispute over the use of hydroelectric resources
of the river Parana (water diplomacy). These are only some examples
of conflict resolution through trade and economic cooperation.
So, lets rationalise trade policy. And lets face down trade barriers.
The rest will follow once other opportunities arise for mutual
assurance and lasting peace.
The author is Secretary General, CUTS International, a leading research,
advocacy and networking group and can be reached at psm@cuts.org
This article can also be viewed at: http://www.financialexpress.com/
10 tio
Time to accelerate economic ties
Published in
Business Line, December 16, 2006
By Pradeep S Mehta & Huma Fakhar
History provides ample evidence that no neighbouring countries
have ever survived and progressed in the background of
prolonged belligerent relations.
A
recent action by the Pakistani government to increase the
positive list of tradeable products from 773 to 1075 under the
South Asian Free Trade Agreement (SAFTA) could result in the
doubling of formal trade from $1 billion to $2 billion. But this
exchange can quadruple if only there is closer economic cooperation
and that could set the pace for normalisation of relations.
Whenever one speaks about the peace-promoting economic relations
between India and Pakistan, sceptics opine that the relations between
the two are marred by the border dispute and cross-border terrorism.
Hence, to expect more peaceful relations between the two fast growing
economies through trade is a dream. We do not agree.
Until recently, it was not known that to promote peace in West
Asia, the US hadadopted a similar scheme. In 1996, US Congress
authorised designation of qualifying industrial zones (QIZs) between
Israel and Jordan (1999) and Israel and Egypt (2004). The QIZs
allow Jordan and Egypt to export to the US duty-free if the products
contain a minimum level of inputs from Israel. The purpose of this
trade initiative was to support the prosperity and stability in the
region by encouraging economic cooperation. It has worked well.
de 11
India, Pakistan entering PTAs
Since both India and Pakistan are preparing to or are entering into
various preferential trade agreements (PTAs, bilateral as well as
regional) with other countries and regions (both with developed and
developing countries) it would be sensible to include QIZ-type of
arrangement in some of the agreements particularly with the EU,
the US and China and even within SAFTA and the proposed ASEAN-
India FTA. Such arrangements would help both Indian and Pakistani
exporters/importers reap the benefits of free trade as well as promote
greater cooperation.
Among other ways to promote economic cooperation is to look at
cross-border infrastructure projects, which have opened prospects
for economic benefits through cooperation. Regional cooperation
projects have the potential to improve the well-being of all parties
involved because of the scale of economies they permit, the
complementarities between the economies, and the externalities they
induce (multiplier effects, attraction of foreign investment, diminution
of gaps, etc... ).
The East-West Economic Corridor (EWEC), a 1,500-km highway
project crossing six Greater Mekong Sub-region countries in South-
East Asia connecting South China Sea to the Indian Ocean, and the
Middle-East Regional Cooperation Projects are some good examples.
Regional trading blocs may be an instrument for peace and
prosperity. As Keynes observed, A Free Trade Union, comprising
the whole of Central, Eastern and South-Eastern Europe, Siberia,
Turkey, and (I should hope) the United Kingdom, Egypt and India,
might do as much for the peace and prosperity of the world as the
League of Nations itself.
Tools for peace, prosperity
Keynes said that trade and commerce have been the most effective
way of establishing peace between rival nations. The formation of
the European Union most effectively united the Continent that for
long was divided and warring. The EU has led to higher levels of
economic well-being resulting from enhanced economic cooperation
amongst the member states. History provides ample evidence that
no neighbouring countries have ever survived and progressed on
12 tio
prolonged belligerent relations. History repeats itself is the saying
going around time and again. The famous economist, Mr Wilfred
Pareto (1889) wrote, customs unions and other systems of closer
commercial relations (could serve) as means to the improvement of
political relations and the maintenance of peace.
Conflict resolution
The Southern African Development Community originated in the
1980s as a coalition opposed to apartheid in South Africa and, more
recently, turned to creating a free trade area. Some observers note
that African Customs unions and free trade areas are as active in
areas such as conflict resolution as in trade liberalisation. Finally,
many see relaxed tensions between India and Pakistan as the real
payoff of SAFTA (World Bank, Global Economic Prospects, 2005).
Many studies also point out that RTAs that expand trade flows
appear to have a substantial dampening impact on conflict. Mansfield
and Pevehouse (2000) attempt to identify empirically the role of
RTAs in ameliorating conflict. They found that, on an average, the
likelihood of the outbreak of a militarised inter-state dispute declines
by around 50 per cent if both belong to the same RTA. However,
only RTAs that expand trade flows appear to have a substantial
impact on conflict.
In Africa, for example, RTAs that address the management of cross-
border resource issues (such as water) are more effective in reducing
military conflict than other RTAs.
Though both India and Pakistan are moving closer, it is at a snails
pace and constantly encountering hurdles. Some of the above
measures could divert attention from sticky matters and accelerate
economic cooperation between the two nations by reducing (if not
eliminating) tensions and mistrust and bringing peace and tranquility
to the region.
Pradeep S Mehta is General of CUTS international, a research, advocacy and
networking group board in Jaipur, India and Human Fakhar is partner, Fakhar
law international and Market Access Promotion, Lahore, Pakistan
This article can also be viewed at: http://www.thehindubusinessline.com/
de 13
For peace to reign,
prepare for trade
Published in
The Business Recorder, Pakistan, June 25, 2005
By Pradeep S. Mehta & Huma Fakhar
A
foundry equipment manufacturer in India procured an order of
Rs 7crores for supplies to a new foundry in Pakistan in 2004.
The equipment was routed through Dubai with all signs of India
removed from the machinery. The Pakistani importer had to pay at
least 17 percent more than what he would have paid if he could
have imported the equipment directly from India.
In any case the cost of similar equipment from other countries would
have been higher by at least 35 percent, so the Pakistani
businessman soundly bought the equipment from India. When he
will need to buy spare parts, he would follow the same circuitous
route. Similar experiences obtain in many such situations, where
goods worth hundred of crores from India and Pakistan are bought
through either a circuitous route or clandestine channels.
However, times seem to be changing and the greater social impacts
seem to have made everyone alive to the fact that every action does
have its rather, grave, economic implications which cannot but be
taken into account. Regional and bilateral trade, more often than
not, have been the first casualty in cross-border conflicts. Its a
double whammy and therefore, costs tend to be multiplicative rather
than additive in their emergence and effect.
14 tio
A simple back of the envelope calculation of such costs indicates
that costs of conflict in addition to the costs of lost trading
opportunities more often than not constitute a not so significant
proportion of GDP. Had it not been for these costs the impact on
social development could have pushed most countries engaged in
cross-border conflict a few notches up the HDI. Conflict deterrence,
therefore, seems appropriate and a Rupee saved, is therefore a Rupee
earned. In times of fiscal stringency with ever widening costs of
running a country, such cost cutting efforts are most welcome.
More significant are the costs to the consumer and the producer -
the most significant segments of the social dynamo. A look at Indo-
Pak trade is rather instructive about the need to make economics
central to all our efforts.
Admittedly, Indo-Pakistan trade is competitive rather than
complimentary, and according to some trade pundits, there is little
scope for expansion. However, a large informal, illegal, border, call
it what-you-like trade indicates the contrary.
Though official bilateral trade figures are pegged at slightly less
than $400mn, illegal trade is $1.5-2bn. Informal trade, through third
country like the foundry equipment purchase, is another $1bn. Some
talk of a range of $2-8bn! Official trade figures apart, informal and
illegal trade are mere guesstimates. Nevertheless, they indicate the
huge potential for trade.
The size of market demand, therefore, cannot be dismissed as piffle.
Business on either side hunts for market access, market penetration,
market share in all regions except in countries with contiguous
borders. Does it make sense or is it force of circumstance? Obviously
the latter. Going by the unofficial figures, who wouldnt want to
trade with there neighbours.
In all this number crunching, the plight of the consumer and the
producer, be it in India or Pakistan is rather unenviable. The
Pakistani consumer pays higher costs virtually for every commodity
coming from India, primarily because of a round-about the
consignment takes to reach from India to Pakistan. Also, something
de 15
available in the neighbourhood, is not permitted becomes more costly
at the point-of-purchase, being sourced from a costlier supplier. India
should consider a preferential tariff and reduced non-tariff barriers
formula for Pakistan.
A Bilateral Investment Treaty can readily neutralise the supply
side constraints in Pakistan and the fear of being swallowed by the
giant Indian economy. At the end of the day despite huge trade
deficits countries have not stopped trading with China. Even Nepal,
Bangladesh and Sri Lanka have FTAs with India. If its only politics
pulling Indo-Pak back, then the new norm needs to be reiterated,
which is, economics will drive politics for all future and practical
purposes.
India should not be looked as a competitor alone, for sure India will
win the numbers game in the short run due to its huge market size,
however, Indian market should be eyed as the hub of investments
and transfer of technology not alone for Pakistan but for the whole
region.
At present, Pakistan, which has one of highest per capita
consumption of tea, imports 150mn kgs mainly from Kenya, even
though Pakistanis prefer Indian tea. India didnt buy from Pakistan
directly. If it did, as is experienced today, the Chana (chickpea) in
our dal in Delhi would be much cheaper being sourced through
Wagah than from Maharashtra!!. Zinetac, a patent medicine for
acidity, sells in India at Rs 7.20 for 10 tablets; it retails in Pakistan
for between Rs 80 and Rs 150.
For decades, Pakistan imports iron ore, rice and sugar from Australia,
Indonesia and Brazil respectively. If we take just another example
of Suzuki motor cars, Pakistanis pay more than twice as much than
what an Indian would do in India. The spare parts of the car are
believed to cost nearly seven times as high. Instead, it could have
been imported these from India, and enjoyed lower transport costs.
Do we see an opportunity here?
Significantly, in times of crisis we knock on our neighbours door. In
1990, India helped Pakistan tide over a potato and onion crisis, and
16 tio
during a sugar shortage in 1997, it imported 50,000 tons of Indian
sugar. Recently, too, Pakistan sourced meat, tomatoes, onions, garlic
and potatoes from India, duty free, to rein in prices and meet domestic
demand.
Similarly, in 2003 India sourced enormous consignments of grains
from Pakistan due to an emergency. Where else could both have
acquired food supplies on an emergency basis but from its neighbour?
It is expected that if importers decide to pass through the price
differentials domestic prices would drop by 15-20%.
On the other hand, Pakistani industries and engineering sector can
benefit from the import of machinery and basic and intermediary
raw materials to reduce the costs of capital goods and machinery as
well as the finished goods. Pakistani textile industry can be the
single biggest beneficiary because Pakistan leads India in coarse
counts 20s and below and India leads Pakistan in fine counts 40s
and above.
In addition, India needs to source woven fabric from Pakistan; one
of the heaviest and more recent investments made by Pakistan
textiles sector is in the woven sector, what could be a better market?
Allowing the import of capital goods and machinery from each other
will offer substantial savings in freight costs and time due to the
geographical proximity.
Economics has assumed a pivotal role in the foreign policy exercise
among nations since the end of the Second World War. History
bears testimony to the fact that even countries of the war-ravaged
Europe displayed a vision by deciding to set aside their mutual
political and security problems for widening their bilateral and multi-
lateral economic interactions.
Lets learn from the humble housewife, who seems to have more
economic wisdom than the political masters of our countries. Buy
from the cheapest source, in commercial language called forum
shopping shopping from the most cost effective forum/source. After
all we just happen to be neighbours. What if our politics makes a
little noise!
de 17
VIEW: Why should trade await
a final settlement?
Published in
Daily Times, March 27, 2005
By Pradeep S Mehta & Huma Fakhar
C
ricket seems to be a far greater force uniting nations and
sentiments than war. If commonality of purpose can exist on
the sports field it can also be a part of trade processes. If one can
play cricket, one can also undertake trade
India and Pakistan have been at loggerheads over Kashmir, among
other things, since independence. However, times seem to be
changing. This change gathered momentum when Pakistani Prime
Minister Shaukat Aziz, at the World Economic Forum meeting in
Davos, Switzerland, at the end of January, proposed to his Indian
counterpart to evolve a series of confidence building measures that
need not be held hostage to the resolution of Kashmir, the central
dispute.
The Kashmir issue has been singularly responsible for blocking
cooperation between the two countries, except where it is imperative
and unavoidable. At international fora, at times, both share similar
views and stands. For example at the World Trade Organisation
(WTO), both are members of the developing countries alliance G-
20 which is trying to ensure that the Doha Development Agenda
will protect the interests of poor countries. Both countries have
been founder members of the WTO and its predecessor, the General
Agreement on Tariffs and Trade (GATT).
18 tio
The two countries are also members of the South Asia Association
of Regional Cooperation (SAARC) and its various instruments: this
includes the South Asia Preferential Trade Arrangement (SAPTA),
to be succeeded by the South Asia Free Trade Arrangement (SAFTA).
However, any progress on either of these protocols has been
mortgaged to the Indo-Pak dtente. Consequently, the entire region
has suffered.
India-Pakistan economic relations have been facing the bugbear of
some myths that continue to define the debate on whether the
countries should or shouldnt resolve all disputes prior to forging
trade and economic relations. Thus, progress on economic cooperation
between India and Pakistan has taken a backseat. In this article,
we have identified the major myths and proceed to demolish them.
Countries at war can play cricket but cannot trade!
Cricket seems to be a far greater force than war. If commonality of
purpose can exist on the sports field it can also be a part of trade
processes. If one can play cricket, one can also undertake trade!
All disputes need to be resolved before economic cooperation?
Policymakers in Pakistan have so far been insisting that unless all
disputes between the two countries are resolved, trade and economic
cooperation will proceed on a case-by-case basis. While some change
is taking place in this line of argument, the jury is still out. We
need to proceed with gradual opening up on both sides: India should
look into serious tariff reduction and Pakistan should give up on
sensitive lists. A good way to begin could be a Bilateral Investment
Treaty (BIT).
Disputes have never prevented economic cooperation around the
world. France and Germany had been at loggerheads for over a
millennium, but now both are major players in the European Union,
which is continuously deepening economic and political cooperation.
Malaysia and Thailand too have border disputes but this has not
prevented them from cooperating economically through the ASEAN
Free Trade Agreement.
de 19
The deepening India and China economic ties also set a precedent.
India and China have a border dispute but have decided to keep it
on the backburner. In 2000, bilateral trade between both countries
was around three billion dollars. Within three years, it crossed $10
billion. Several estimates show that India and Pakistan can also
achieve similar levels of trade if they decide to open up their borders.
Reciprocity should be followed in dispute settlement
Reciprocity may not be useful in the current environs. Times are
testimony to the adverse impacts economic growth has faced in both
these countries. What cannot be undertaken officially has somehow
been substantiated unofficially. The market apparently knows what
is right. Unofficial trade has already reached an estimated staggering
two billion dollars. Imagine if this trade is carried out officially,
reducing costs and having a trickle down effect. India has already
granted Pakistan the MFN status, in spite of pending disputes.
Curtailing trade due to unsettled issues is reciprocity at its worst.
One should therefore, attempt a non-reciprocal approach to foster
more trade.
India will dominate the economy of Pakistan if trade is
liberated
There is concern that if Pakistan liberalises trade relations with
India, the latter will dominate Pakistans economy. Undoubtedly
India will have a trade surplus against Pakistan as it has with
other neighbours, Bangladesh, Nepal and Sri Lanka. Yet no one
complains. To the contrary, the Free Trade Agreement between Sri
Lanka and India has led the two to initiate talks on further custom
union integration. Simple economic rationale indicates that India
enjoys these surpluses because of the size of its economy and the
comparative advantages it enjoys. But this does not translate into
a domination of Pakistans economy by India.
If strong economies always dominated bilateral trade then China
and the US would dominate all economies with which they have a
trade surplus.
On the contrary, USA runs a deficit with most trading partners,
which do not dominate the American economy. China has a trade
20 tio
surplus against US, which exceeded $68 billion in 2000. China had
a trade surplus of $ 0.8 billion in 2003 against Pakistan. This doesnt
indicate economic subjugation. On the contrary it indicates vibrancy
and a leashed domestic demand waiting to be harnessed and catered
to. Bilateral trade will help both countries. Take the case of the
India-Pakistan-Iran pipeline. It will fetch Pakistan an annual income
of $500 million.
Trade will lead to disputes which will promote more conflict
Trade disputes take place between all trading partners, as can be
seen from the history of the WTO and other dispute settlement
machinery. These are resolved through legal processes. Countries
do not and should not resort to violence to resolve commercial
disputes. This is not something to worry about. Disputes indicate a
dynamic relationship.
Will there be a peace dividend if the cooperation is concretised?
There will be a huge peace dividend if trade relations are
strengthened. When two countries trade with each other, people
develop an interest in maintaining peace, so that the flow of goods
and services is not disrupted.
Will it lead to the dissolution of other issues?
When countries are trading with each other, they avoid conflicts. If
there are any disputes, as is likely to happen, they use dialogue to
resolve them. What has been seen in many similar situations is
that countries decide to maintain the status quo (somewhat like the
LoC) and move on.
They always say one should learn from the lessons of history. We
should also not repeat the mistakes that were made while history
was being written.
Pradeep Mehta heads a leading consumer protection NGO in India. Huma Fakhar
heads Fakhar Law International and M@P in Geneva and Pakistan
de 21
Mutual trust achieved, additional measures would include a
commitment to keep talking: its never over until its over
P
akistan and India have just exchanged lists of their nuclear
installations, as part of a mutual assurance that these shall not
be attacked by either party in the event of any conflict. However,
exchanging lists is not sufficient cover for an unwarranted action by
either country. Can we think of a strategy to ensure that there is
no threat of any nuclear or conventional attack ever?
A successful model exists in the Argentine-Brazilian nuclear
rapprochement. In the era of colonialism, the two European powers,
Spain and Portugal had expanded their own rivalry through
territorial conquests in South America: the former in Argentina and
the latter in Brazil. Even after their administrative independence
(Argentinas in 1816 and Brazils in 1822), the burden of colonised
mindsets found continued expression in a South American rivalry
between the two. They vied with each other for leadership of South
America, with all the usual antagonism and mistrust.
Although the South American experience could be valuable, one
important difference must be mentioned: while Argentina and Brazil
For more than mutual assurance
Indo-Pak lessons from the Argentine-
Brazilian model of cooperation
Published in
Financial Express, India, January 12, 2007
By Pradeep S Mehta & Abid Suleri
22 tio
were rivals, they were not enemies. The only war between them took
place in 1825, more than a century-and-a-half ago, giving birth to a
new (buffer) state, Uruguay, through the peace treaty of 1828. Their
relations since have alternated between cooperation and competition,
but no single shot was ever fired. A bitter border dispute was resolved
by arbitration, not war. In 1985, they both grasped a moment of
economic logic to put an end once and for all to the mistrust that
had bedevilled bilateral relations for so long. Thus did social and
economic relations come into focus. The subsequent period can be
divided into two stages. In the first (1985-1988), the approach taken
was bilateral. In the second (1989), the process had a dual objective:
first, to bind the signed agreements legally, and second, to integrate
the agreements with international nonproliferation regimes.
It was as a part of this endeavour that these two countries, alongwith
Paraguay and Uruguay, formed the South American Common Market
(Mercosur) in 1991, which was later joined by Chile in 1996 and
Bolivia in 1997. The aim of this common market was to enhance
trade and investment opportunities, as these countries realised that
closer economic relations facilitated by free trade would consolidate
mutual understanding, confidence and cooperation.
There are several other examples in history of neighbourhood peace
and prosperity taking the place of hostility and heartburn. Europe
put aside the bitter Nazi experience for the formation of the European
Union. Even in Asia, it is hard to believe that Thailand, Vietnam
and Cambodia were ever at war.
There are several lessons that can be derived from all this. First and
foremost, to be successful, an exercise of this kind must be motivated
by sincerity of purpose. No such moves can have the slightest chance
of success if they are taken with the ulterior motive of destabilising
the other party. As a first step, a country should open itself to the
other party, on the understanding that this policy will be reciprocated.
Information should flow fully and freely from one country to the
other. Of course, the sense of mutual trust thus attained will not
last if flanking and additional measures do notfollow to give it
permanence. Additional measures would include a commitment to
keep talking: its never over until its over. Second, constructive
engagement works better than pressure: renewed reinforcement of
the will to support bilateral confidence-building measures would lead
de 23
to more progress than diplomacy-based political criticism involving
cross-accusations on issues like terror (which, it hardly takes a couple
of minutes to reiterate, requires dedicated action on both sides).
Third, regional cooperation infrastructure projects could be proposed.
The East-West Economic Corridor, a 1,500 km long highway project
crossing six Greater Mekong Sub-region countries in the Southeast
Asia, and the Middle East regional cooperation projects are some
good examples. Likewise, mega-economic projects like the
Turkmenistan-Afghanistan-Pakistan and the Iran-Pakistan-India gas
pipeline projects would help promote regional economic cooperation
between India and Pakistan.
Lastly, it may be beneficial to look for opportunities where the US
(and EU) foreign policies can support bilateral initiatives. River
diplomacy in Argentina, for example, accelerated bilateral cooperation
in the nuclear arena. The initiative to expand Indo-Pak bus
diplomacy should receive US and EU support. The US could offer
incentives by offering the benefits of its Qualifying Industrial Zones
scheme (by which exports from Jordan and Egypt containing inputs
from Israel enter the US duty free), under its Generalized System
of Preferences.
Sceptics would argue that in the Indo-Pak case, the Kashmir dispute
is sui generis, and thus any improvement of relations is dependent
on its resolution. Even if this is so, one can draw lessons from North
Ireland. After 30 years of conflict, the Irish Republican Army has
agreed to lay down arms. Frankly, neither India nor Pakistan would
like an independent Kashmir. Yet, fortunately, there is a window of
opportunity at the moment. Pakistan President General Pervez
Musharraf and Indian Prime Minister Dr Manmohan Singh have
both suggested ways to craft a lasting peace between the two nuclear
countries. The yearning for peace is evident among people on both
sides, as also in Kashmir. Is it not time to grab it and move ahead?
Pradeep S Mehta is Secretary General of CUTS International, a research,
advocacy and networking group board in Jaipur, India and Abid Suleri is
Assistant Executive Director of the Islamabad-based Sustainable Development
Policy Institute.
This article can also be viewed at: http://www.financialexpress.com/
24 tio
W
hile reporting the terror attack on the Delhi-Lahore train, FE
(February 20, 2007) carried an editorial saying, it is during
such moments of tragedy that the real basis of subcontinental peace
can be glimpsed. That basis does not lie in complex territorial
negotiations, but in more and more, ultimately leading to free and
open, two-sided flows of people and business.
Despite resumption of rail-road links, the journey between the two
neighbours is critically dependent upon the security and safety of
travellers. The governments of the two countries must address the
challenges of security to sustain the renewed interest of the people
in visiting each other more frequently. The Indian Express-Dawn
News-CNN-IBN opinion survey in both countries and an NDTV
24X7 debate in Karachi give a clear message that people on both
sides of the border feel that friendship and cooperation (read trade)
are a prerequisite for improving relations between the two
neighbours.
There are enough examples showing how treaties of sharing river
waters, cross-border infrastructure projects and nuclear
rapprochement have partially bridged divides between hitherto not-
so-friendly or even belligerent countries. The Indus Water treaty of
1960 has ironically survived more than 47 years of conflict over
Kashmir. Likewise, the war between Cambodia and Vietnam has
not prevented them from reaping the fruits of a 1,500-km long
Trade against terror and tragedy
Published in
Financial Express, India, March 30, 2008
By Abid Suleri, Pradeep S Mehta
de 25
crossborder highway project. And the Middle East Regional
Cooperation projects have encouraged trade and thereby peace and
prosperity in the region.
India and Pakistan are regional nuclear powers and have recently
exchanged lists of their nuclear installations. However, mere
exchange of lists is not sufficient cover for an unwarranted action
by either party. The Argentina-Brazilian nuclear rapprochement is
an example worth emulating. They initiated bilateral efforts towards
nuclear rapprochement in early 1980s. During 1985-88, they pursued
the issue bilaterally and signed an agreement, which was made
legally binding in 1989. Subsequently, they became the members of
regional and global non-proliferation regimes by taking the issue to
the international forum. This agreement encouraged the countries
to seek cooperation in the economic sphere as well. Having realised
that closer economic relations facilitated by free trade would further
strengthen understanding and mutual cooperation, the two countries
persuaded Paraguay and Uruguay to form the South American
Common Market (the Mercosur) in 1991. They were joined by Chile
in 1996 and Bolivia in 1997. The common market was formed with
an objective to enhance trade and investment among these countries.
In a similar vein, Safta offers us an opportunity to make it a vehicle
of peace and prosperity in the South Asian region.
Such vehicles of peace have become very important, given the growing
incidence of terrorism in the sub-continent. Until recently, it was
only India that was a victim of cross border terrorism, but of late,
Pakistan has also experienced it. This has demonstrated that terror
has no religion and knows no national boundaries. Terrorism has
thus become a common problem for both nations. Cooperation
between the two countries on this issue will go a long way in building
trust and confidence and mitigating myths and distrust between
the nations.
Historically, Pakistan has been a close ally of the US. The US has
been helping Pakistan not only economically but also in many other
ways. The US considers Pakistan a great ally in combating
international terrorism. Of late, India has also inked a civilian
nuclear supply agreement with the US to meet its rising energy
26 tio
needs, and many political observers comment that in doing so, it
has compromised its long-standing stance of non-alignment. Keeping
such rhetoric aside, it may be beneficial to look for opportunities
within the framework under construction by which the US (and EU)
foreign policies can work in favour of supporting bilateral initiatives.
River diplomacy in Argentina, for example, accelerated bilateral
cooperation in the nuclear arena. The initiative to expand Indo-Pak
bus diplomacy could also flower with EU and US support. To
create peace through economic (trade) cooperation in the Middle
East, for example, the US has offered a Qualifying Industrial Zones
scheme under its Generalised System of Preferences. Under this
scheme, exports from Jordan and Egypt containing inputs from Israel
can enter the US market duty free. A similar preferential access
scheme, if offered by the US to India and Pakistan, would be an
element in the mutual cooperation efforts between the two countries
for peace in the region.
Some experts observe that there is little scope of trade expansion
between India and Pakistan as the countries are competitors rather
than complements in the world Economy. However, a large illegal/
informal, border trade indicates the opposite. Though official bilateral
trade figures currently stand at slightly less than $1 billion, the
illegal trade is in the region of $1.5-2 billion. Informal trade, through
a third country, is another $1 billion. Though informal and illegal
trade figures are mere guesstimates, they nevertheless indicate the
huge potential for enhanced trade relations between India and
Pakistan.
Mehta is Secretary General CUTS International, Jaipur and Dr Suleri is
Executive Director of Sustainable Development Policy Institute, Islamabad. Dr
NC Pahariya of CUTS contributed to this article. These are the personal views
of the authors.
This article can also be viewed at: http://www.financialexpress.com/
http://www.jang.com.pk/
de 27
Not enough is being done to encourage business
between Pakistan and India
I
ndia and Pakistan, as discussed in our last article (Trade against
terror and tragedy, March 23), have new opportunities to intensify
the engagement, even as the contextual incentive framework
undergoes changes. In a world so keen on the gains of trade
liberalisation, it is now well recognised that it is a pity that the
potential for trade between India and Pakistan is not being addressed
fully, despite the fact that entrepreneurship has flourished on both
sides of the border.
Unfortunately, governments on both sides are not doing enough to
pave the way for an increase in the volume of trade and a concomitant
restoration of amicable relations. With globalisation upon us, trade
negotiators of both countries should use the skills of commercial
diplomacy as a complement rather than replacement for
neighbourhood diplomacy, and vice versa.
There are several examples of such diplomatic endeavours. China
imposed a ban on imports of Japanese rice in 2003 following the risk
of insect infection. But later, an agreement (rice diplomacy) signed
between Japan, the worlds most expensive rice producer, and China,
the worlds largest rice consumer, restoring rice imports by China
and salvaged the neighbourhood relationship.
Trade to the forefront
Published in
Financial Express, India, April 20, 2008
By Abid Suleri, Pradeep S Mehta
28 tio
In the subcontinent, it is important to point out that the two countries
have indeed come to each others aid in times of crises. Pakistan
approached India in 1990 to help it tide over a potato and onion
crisis, and imported Indian sugar during a shortage in 1997. Similarly,
India imported foodgrains from Pakistan in 2003 on account of an
emergency. Who else could have helped on an emergency basis in the
case of essential commodities but a neighbour?
The February 18 elections have brought back parliamentary
democracy in Pakistan. Here, it must be kept in mind that Pakistani
voters gave a heavy mandate to the Pakistan Peoples Party (PPP)
and Pakistan Muslim League Nawaz (PML-N) with the hope that
this alliance would help to end the Constitutional as well as economic
crisis facing the people of Pakistan. This mandate comes with a huge
responsibility that is, of restoring supremacy of the Constitution,
and providing immediate relief to people on the socio-economic front.
While the first one (especially restoration of the judiciary) would
understandably take some time, people would demand an immediate
relief to their economic miseries. This, in turn, requires fiscal space
that can easily be created, first by reducing military spending (one
quarter of current expenditures are on defence), and second, by
promoting intra-Saarc trade to reduce the trade deficit.
The political leadership in India seems ready to avail the opportunity
provided by a democratic change in Pakistan. India has expressed
hope that economic relations between the two will improve after the
formation of a democratically elected government in Pakistan. The
co-chairman of the PPP, which is the leader of the alliance with
PML-N, Asif Ali Zardari said in an interview with Karan Thapar on
the The Devils Advocate on March 1, 2008, that India and Pakistan
could set aside the Kashmir issue to be resolved by a future
generation, while they focus on trade and economic ties to improve
bilateral relations. This was widely reported, but it was not all that
he said. Zardari also added that people-to-people contacts should be
improved, then inter-dependence of trade if Indian industry depends
on Pakistani energy, and we depend on the Indian market for our
products to be sold, we are both inter-dependent, financially integrated
industry-wise. If the new democratic government of Pakistan acts
on this premise and comes out with a decision to confer the much-
de 29
awaited most favoured nation (MFN) status on India, and India in
turn reduces its much criticised non-tariff trade barriers (NTBs)
against Pakistan, the way for more trade and cooperation between
the two most dominant countries in South Asia would be paved.
These gestures would also give a fillip to Safta, which has remained
dormant for far too long.
Pakistani voters have rejected military and mullahism (seen in North
Western Frontier Province where Awami National Party and PPP
have formed the government). An eco-politically stable Pakistan is as
important for India and the US as it is for the people of Pakistan.
Now it is the collective responsibility of the forces that would like to
see peace in this region to combat terrorism and tragedies through
trade. (concluded)
30 tio
India & Pakistan: Being
Economically Savvy Yields a
Peace Dividend
Published in
The Economic Times, July 18, 2008
By Pradeep S Mehta & Abid Qayyum Suleri
T
he first foreign secretary and foreign minister level talks between
India and Pakistan, held in Islamabad in May, after the
restoration of democracy in that country, led to a consensus to continue
the ongoing peace process and push for an improvement in bilateral
economic relations with the resolution of all issues related to Kashmir.
In a bid to improve and make relations more cordial through a series
of confidence building measures, the two sides agreed to increase the
frequency of bus services between the two countries, firm up modalities
for intra-Kashmir trade and truck service and implement other
measures to give a fillip to cross-border travel.
They reaffirmed the significance of ceasefire along the Line of Control
(LoC) and committed themselves to cooperation with a mission of
safeguarding the LoC as well as liberalisation of visa norms to
facilitate people-to-people contact. It was recognised that the menace
of terrorism plagues both countries; both sides reaffirmed not to
permit it at any cost to obstruct the peace process. It was agreed to
activate a joint anti-terror mechanism so that incidents of terrorism
do not affect their ties.
de 31
What is more important is that both nations now realise that
improvement in economic (trade) relations should not wait for conflict
resolution. The dawning of this realisation has led to an emphasis
on the development of better political relations and defence
cooperation as well as stronger trade ties through the dialogue process.
That trade and conflict resolution are complementary, as shown in
many other instances in geo-political history, was also spoken about.
Importantly, trade can also result in almost normal relations despite
unresolved problems between countries. For example, foreign minister
Pranab Mukherjee said, trading relations between India and China
have improved continuously over time in the recent past (total trade
has touched $40 billion and is expected to reach $60 billion by 2010),
despite their relationship being characterised by contentious issues.
It is expected that the resumption of the composite dialogue process
between India and Pakistan will give a fillip to bilateral trade, besides
facilitating early execution of various gas pipeline projects such as
Iran-Pakistan-India (IPI) and the Turkmenistan-Afghanistan-
Pakistan-India (Tapi) projects involving the two neighbours. It is
hoped that bilateral trade between the two countries, which stood at
$2 billion in 2007-08, rising from a low of just $235.74 million in
2001-02, would touch $5 billion by 2010. During 2002-03 and 2007-
08, Indias exports to Pakistan and its imports from Pakistan have
grown by 62% and 65%, respectively.
Indo-Pak trade could have grown by even higher rates had Pakistan
reciprocated in according the Most Favoured Nation (MFN) status to
India under its WTO obligations. Pakistan has expanded its positive
list of imports from India from 774 products to 1074 products. These
products include machinery/equipment, raw materials, chemicals and
accessories of a number of manufactured items that are in great
demand in Pakistan. Presently, the main commodities of export to
Pakistan are dyes, sugar, plastic and petroleum products and cotton
while the main items of import are petroleum and crude products,
fruit, cotton yarn and fabrics and organic chemicals.
As the figures above indicate, the formal trade between the two
countries has been abysmally low, although a great potential to
increase it exists. Trade between India and Pakistan, measured by
32 tio
the sum of their bilateral exports, is less than 1% of total exports
from India and Pakistan. It is just 4% of the equivalent measure of
bilateral trade between Malaysia and China, two countries of
comparable GDP and proximity and only 9% of the equivalent measure
of trade that occurs between Argentina and Brazil, other countries of
comparable size.
A World Bank study based on field research in border regions, Dubai
and major urban markets has estimated informal trade between India
and Pakistan at $545 million in 2005. The Indian Council for Research
on International Economic Relations (Icrier) in its 2007 survey of
Indian firms estimated a vast untapped trade and investment
potential between the two countries in goods and services. The study
showed that the total trade potential between the two countries is
$11.6 billion, of which Pakistans export potential is $2.1 billion and
$9.5 billion is the figure for India. Business chambers of India and
Pakistan have also identified several items with export potential,
including services and tourism.
Recent trends do show that trade has picked up considerably between
the two countries and therefore there is much hope of salvaging the
situation and tapping the hidden potential for trade between the
countries. In fact, the deepening of trading relations has been
accompanied by more peace building measures such as opening up
of bus and truck services and greater social contact.
The current political atmosphere in both countries favours deeper
political and economic interactions leading to more trade and
investment. In the joint press conference after the ministerial meeting,
Pakistans foreign minister Shah Mahood Qureshi declared that his
government was ready for a grand reconciliation with India through
dialogue to resolve all outstanding issues with self-respect and dignity.
Though such statements are not new, they might be considered
significant in the changed circumstances, in particular, the return of
democracy to Pakistan and the two main ruling political party leaders
Asif Ali Zardari and Nawaz Sharif expressing their desire to improve
ties with India and reap the benefits of trade and closer social contact.
de 33
With foreign minister Pranab Mukherjee reciprocating the feelings
expressed by counterparts across the border, India and Pakistan
have probably entered a crucial stage in their relations which could
herald a new spirit of complementarity and synergy as both countries
develop rapidly. It is hoped that such trends will be consolidated by
the proposed visit of the prime minister Manmohan Singh to Pakistan
later this year.
The author is Secretary General, CUTS International, a leading research, advocacy
and networking group and can be reached at psm@cuts.org and Suleri is executive
director of Sustainable Development Policy Institute, Islamabad
This article can also be viewed at: http://epaper.timesofindia.com/
34 tio
Indo-Pak trade:
Cutting the Gordian knot
Published in
The Economic Times, August 06, 2008
By Pradeep S Mehta & Siddhartha Mitra
P
akistani press, particularly the Urdu press, is crying foul on the
new trade policy announced mid-July . The usual refrain is that
Indian goods will flood Pakistan. With a common border of around
3,000 km, striking cultural similarities, a common DNA and almost
no linguistic barriers, India and Pakistan are natural trading partners.
However, the bloody partition that resulted in the birth of the two
nations, wrangles over territory and inflated egos often characterising
young and proud nations have ensured that only a tiny fraction of
potential cooperation has been achieved. Yet, recent developments,
particularly on the Pakistani front, indicate that all is not lost and
there might be lasting peace and much more trade between these
nations.
Let us look back at the immediate past and then envision the changes
that might breathe fresh life and amity into the relationship between
these two often hostile nations. In 2006-07 Indian exports to Pakistan
were valued at $1.35 billion - a mere 1.06% of Indias exports to the
rest of the world and indeed a small fraction when compared to the
3% of the rest of the world population residing in Pakistan. The next
year, 2007-08, was only slightly better: official Indian estimates show
Pakistani share in total Indian exports of 1.1%.
de 35
Indias imports from Pakistan were in even more minuscule proportion
to its imports from the rest of the world just 0.17% or $0.32 billion
in 2006-07 , which fell to 0.12% in 2007-08 , according to official
estimates. In other words, Indias imports from Pakistan per Pakistani
resident are just 4% of its imports per rest-of-the-world resident.
The intensity of Indias trading relations with Pakistan appears very
weak when compared with relatively distant Indonesia, a country
which is otherwise similar to Pakistan in many respects Asian,
with comparable population, predominantly Islamic and a per capita
income that is not vastly different from the Pakistan. Yet, Indonesia
accounted for $2.026 billion and 1.6% of Indian exports in 2006-07 ;
its imports were even more impressive at 2.24% of Indian imports.
There is no doubt that there is immense untapped potential for trade
between India and Pakistan. A 2007 study by Icrier, an economic
think tank located in Delhi, indicates an Indian export potential of
$9.5 billion vis--vis Pakistan and a smaller import potential of $ 2.2
billion. This implies that currently India and Pakistan are exploiting
around 15% each of their export potentials vis--vis each other.
Both countries have adopted different methods to shut out imports
from the other country Pakistan imports strictly on the basis of a
positive list which catalogues items from India to be allowed across
the border; potential Pakistani exports to India are often blocked by
Indias technical barriers to trade and sanitary and phyto-sanitary
measures.
Lack of information on each side about the other is also responsible
for the lack of depth in trading relations. After years of treating each
other like strangers in a rapidly globalising world, good sense has
made a sudden appearance in Indo-Pak trading relations. Pakistan
in its new trade policy of 2008-09 has announced that it plans to
promote raw material and capital good imports from India and take
advantage of the lower freight charges to reduce its cost of producing
output.
Imports of CNG buses, processed diesel and fuel oil, machinery,
mining, quarrying and grinding equipment, stainless steel, cotton
yarn, academic and scientific books from India are now being allowed
36 tio
into Pakistan. These measures follow other enabling steps like
facilitation by both parties of trade across the Wagah border and the
increasing use of rail transport as a vehicle for trade.
These steps not only signify a new era in Indo-Pak trading relations
but as a consequence will also usher in a new age of diplomacy and
peace between the two nations. Pakistans willingness to repose trust
in India as a conveyor of essential inputs can be interpreted also as
a goodwill gesture and an olive branch; a nation will surely not
quarrel with another on which its economic interests depend crucially.
The time has also come for India to respond generously. While the
mentioned non-tariff barriers cannot be relaxed by India for just one
country, the Indian government can help in alleviating information
constraints about potential importables from Pakistan; infrastructure
improvements like wider roads, more spacious truck depots and
warehouses near the Wagah border as well as a reduction in time
involved in Customs and related procedures might help. These
constitute possible demand and supply side drivers of an increase in
imports from Pakistan.
Apart from productivity enhancing and cost reducing effect of greater
trade between the two countries, consumers too will benefit. Many
goods which now fall in the category of nontradables in either country
might become tradable as borders become more porous to goods and
services over time. The resulting competition transcending national
boundaries would surely imply lower prices and higher quality,
resulting in greater consumer welfare.
The more dire possibility that India will not reciprocate also exists.
There is a temptation to let Pakistan make all the liberalising moves
and benefit through the expanding trade surplus and the lopsided
relationship that it might imply. However, this is not an advisable
course of action Pakistan might be forced to retract its steps if it
does not get a reciprocal response from India.
The authors are Secretary-General and Director (Research), CUTS International
and can be reached at psm@cuts.org and sm2@cuts.org respectively.
This article can also be viewed at:http://economictimes.indiatimes.com/
de 37
A lowering of barriers to formal trade will not only result
in formalisation of current informal trade but also
encourage hitherto unengaged players
I
f a person completely unaware of sub-continental history was to
read about current Indo-Pak relations, he would probably never
guess that barely sixty years back the combination of the two was
spoken of as one country. Cultural, linguistic and religious ties which
have bound together their peoples for centuries have been rendered
impotent in the period that has followed independence from British
rule. Sanity has given way to the blinding effect of communal
differences and turf battles which have spawned continuous cross-
border tensions between the nuclear-armed neighbours and
intermittent terrorist activities.
Given this rather unsettling history of Indo-Pak relations, the Aman
ki Asha initiative to improve ties by building better business and
cultural relations represents a gust of fresh air. The potential of this
initiative to generate a peace dividend through trade and investment
facilitation across the border has been fairly revealed by the two day
meet organised a few weeks ago by CII in cooperation with the
Times Group, the Jang Group of Pakistan and the PakistanIndia
CEOs Business Forum. Cooperation in the pursuit of self interest
and profits could be the ideal salve for long strained relations because
Six Decades after Separation
Published in
The News, Pakistan, June 13, 2010
By Pradeep S Mehta and Dr. Abid Qaiyum Suleri
38 tio
of the immense clout that business lobbies wield with their
governments.
Trade between India and Pakistan has always been a sorry tale of
intermittent progress being blunted by subsequent regress. Annual
trade volumes leapfrogged from $251 million to $2.3 billion over
2000-01 to 2007-08. But the 26/11 terror attack on Mumbai took the
wind out of the sails of this upward trend and squashed the resulting
peace and economic dividends thus earned. 2008-09, therefore, saw
a 19 percent drop in bilateral trade to $1.81 billion.
However, it is important to assume a positive attitude and treat such
regress as only a temporary setback as the future though uncertain
is shaped significantly by the trinity of hope, foresight and planned
action. This is especially true in the case of Indo-Pak relations as
there is much to gain: according to some estimates, trade between
the two nations can reach $10 billion. It should be noted that informal
trade between the two countries has been estimated by different
sources as ranging from $0.5-$3 billion. Such informal trade is
obviously undertaken at great risk to involved agents and involves
a sacrifice in profit margins born out of measures to escape the
official ban on such trade. This restricted trade regime also deprives
consumers of their right to choose. A lowering of barriers to formal
trade will not only result in formalisation of current informal trade
but also encourage hitherto unengaged players to access markets
and sources of supply across the border.
There are some obvious means to effect the lowering of the mentioned
barriers. Pakistan can replace the lengthy positive list for Indias
importable items with a negative list to enable trade in newly
emerging products. Likewise, India can reduce its non tariff trade
barriers towards Pakistan. Easing of visa requirements to facilitate
more effective exchange of human capital and business travel; and
the scrapping of visas restricting stays to a single city and the
associated requirement of reporting to police stations are other obvious
measures. Flexibility in mode of travel as well as port of entry is
another desirable step not only to enhance trade ties, but also to
improve people-to-people relations. Roaming facilities to link the
mobile networks of both countries would enable business travellers
de 39
to keep in touch with developments at home and thus make such
visits less stressful and more effective.
The exploitation of other potential avenues for economic cooperation
requires more careful planning and coordination between the two
countries. Textiles features in the top three exports of both countries
to each other paving the way for potentially beneficial collaboration
in terms of research and development and integrated sourcing. A
partnership will boost quality of exports and enable these countries
to enhance shares in markets in both EU and US.
The challenge of enhancing food security suggests another such
avenue. According to estimates of Food Security Risk Index by Britain
based Maplecroft, Pakistan is ranked 11 with a tag of extreme risk
and India at 25 with a label of high risk. SDPI, SDC and WFP
recent report, State of Food Insecurity in Pakistan estimates 48.6
percent people in Pakistan are food insecure. In spite of large areas
under wheat and rice cultivation, India and Pakistan are worse off
than China because of significantly lower yields. Technological
cooperation between the apex agricultural organisations of both
countries might provide a viable solution in this regard. Both the
countries can rely on food imports from each other in the time of
need, rather than importing from third country. Food import from
neighbouring country would not only be quicker but cheaper as well.
Another area of potential cooperation could be in the education sector
and facilitate broadening of the human capital base in these two
countries which are still marked by low average education levels and
inadequate leveraging of human productive potentials. Such
cooperation can take the form of student exchanges which can pave
the way for closer relations in other fields such as culture and business
and lower the risk of miscommunication between the citizens of these
countries. Mutual recognition of academic degrees would not only
help in human resource development but would also open up the
doors for trade in other services such as health, engineering, and
financial sectors.
However, the harvesting of potential in all its mentioned forms is
crucially dependent on improvements in cross-border connectivity:
40 tio
efforts to bring a formal direct land route between the countries into
operation; improvement in flight connectivity between major Indian
and Pakistani cities; and enhancement of the capacity of the Wagah
border to support large volumes of trade.
As discussed, the potential benefit from plucking the low hanging
fruits of economic and related cooperation between India and Pakistan
as well as planned economic coordination is immense. The meeting
of minds facilitated by the Aman Ki Aasha initiative promises to
generate the necessary goodwill and exchange of ideas that can fast
track such economic alliances. This is reflected amply by the
enthusiasm of business communities at the recent meeting. The
lethargy and animosity of the past six decades calls for sustained
efforts by business leaders to continue building bridges of mutual
interest and cement budding alliances.
Pradeep S. Mehta is the Secretary General of CUTS International; Dr. Abid
Qaiyum Suleri is the Executive Director of Sustainable Development Policy Institute.